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Reference Labs: Choosing a Primary Vendor

Do you know how many reference labs your hospital is using? If it’s a question you haven’t considered, you’re not alone: most hospital executives aren’t aware of how many reference labs their hospitals rely on. We pulled the average number of reference labs being used across the 60+ hospitals within Valify, and I’m surprised to inform you that it’s 15 unique vendors.

If you’re not familiar, a reference laboratory is, by definition, a laboratory designed to handle a wide range of tests at high volume. There are two big buckets you can lump the primary reference labs into: Academic and Non-Academic. There are four mega reference lab vendors and luckily you can divide them equally into these two categories. The two Academic labs are Mayo Medical Laboratories and ARUP. The two non-academic reference labs are Quest Diagnostics and LabCorp (Laboratory Corporation of America). There are hundreds of other reference labs out there but these are the primary ones.

Standardize to One Primary Reference Lab

Ideally, your hospital should rely on a single reference lab for at least 80% of the tests you send out. I know it sounds difficult to do, but I assure you that it can be done and it’s not as bad as you think. I have seen hospitals successfully standardize from all of those vendors listed above to just one of those primary reference labs. The beauty is that you can typically get your new vendor to handle all of the heavy lifting during the process.

There are many advantages to be gained from standardizing to one primary reference lab including:

Volume discounts on your individual tests

Free outreach consulting from most vendors to increase revenues

Better negotiating power to get your primary vendor to build your test library for free

Unlimited access to their PhDs for help

Why Can’t My In-House Lab Run These Tests?

Every acute care hospital has an in-house laboratory with a Director of Laboratory and most likely several lab technicians using really expensive equipment. So you might be wondering why your hospital sends out so many tests to these reference lab vendors.

The short answer is that your hospital does not have the equipment or the expertise to run and interpret every test your physicians order. Reference lab vendors can carry out difficult, esoteric procedures that are beyond the capabilities of in-house hospital laboratories.

Some tests are rare enough and require such expensive equipment that most hospitals find it prohibitive to acquire the capabilities needed to carry them out. On the other hand, reference laboratories find it economically feasible to offer these tests, because they can perform them for hospitals across the country.

A very simple question needs to be asked even with tests that hospitals may be tempted to carry out themselves. Can you run and interpret the test for less than an outside reference lab vendor?

Because reference labs are in the business of testing, and because they serve many different medical facilities, they can invest in the very best and most up-to-date equipment and training while also keeping their per test rates low.

For this reason, many hospitals have begun to rely on reference laboratories more extensively. As a case in point, in 1995, Massachusetts General Hospital (MGH) sent out 17,254 tests to reference laboratories. That number grew to 83,390 by 2006, a 383% increase.

Specialized Tests

The rise of new molecular diagnostic tests, which require very specialized equipment, was the main factor behind MGH’s decision to outsource more of its testing. Thanks to economies of scale, a large reference lab can perform a tremendous variety of tests in great numbers, and at a much-reduced price compared with any in-house hospital lab.

Reference laboratories also excel at quality control, and can help hospitals to choose the best testing and reduce unnecessary costs. For example, genetic testing is common in many different medical specialties, but due to the highly specialized nature of genetic testing, errors are common during ordering.

One study found that about 26% of all orders for complex genetic tests placed with Associated Regional University Pathologists (ARUP) were changed on the advice of ARUP’s genetic counselors.

The genetic counselors had their clients’ best interests at heart: correcting the tests saved the referring institutions about $48,000 a month.

Choose Wisely

Ideally, your primary vendor should be a national lab, or at least a regional lab. In general, the larger and more successful the lab, the better and more cost-effective its services are likely to be.

Having an academic lab on contract to do Ph.D.-required testing is also ideal but may be slightly more expensive at a test-to-test comparison. Don’t be afraid to leverage your GPO for good lab rates and contract terms, either. When negotiating, rely on your past 12 months of test volume to take advantage of high-volume discounts.

Finally, remember that switching vendors can be costly. Hospitals typically spend about $10,000-$15,000 in development costs on their Laboratory Information System (LIS) when starting with a new reference laboratory. You should be able to negotiate all or a big part of this expense to be reimbursed by your primary reference lab vendor. Don’t be afraid to ask!

Conclusion

Reference labs have a lot to offer hospitals when it comes to testing. Find a good one and negotiate a deal through your GPO, and your hospital will benefit from more cost-effective and high quality testing. This is one of the categories that I actually feel your GPO does a really good job for their members. Most also have hired industry experts that you can tap into to help handle this entire process, so take advantage of them.

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